Equity release refers to a range of products that allow clients to access the equity (cash) tied up in their home if they are aged over the age of 55. Clients can take the money released as a lump sum; in several smaller amounts; or a combination of both.
There are generally two equity release options as follows:-
- A Lifetime Mortgage
This is where you take out a mortgage secured on your property (provided it is your main residence), whilst retaining ownership. You can choose to make repayments or let the interest roll-up. The loan amount and any accrued interest is paid back when you die or when you move into long-term care.
- A Home Reversion
This is where you sell part or all of your home to a home reversion provider in return for a lump sum or regular payments. You have the right to continue living rent free in the property until you die, but you must agree to maintain and insure the property. This also provides an opportunity to ring-fence a percentage of your property for later use, possibly for inheritance purposes. Unless you decide to take further cash releases, the percentage you retain will always remain the same, regardless of changes in property values. On death, your property is sold and the sale proceeds are shared according to the remaining proportions of ownership.
A Lifetime Mortgage
In practice, most people take out equity release using a lifetime mortgage.
Most people do not make any repayments while they are alive, so interest rolls up and the unpaid interest is added to the loan amount. Some lifetime mortgages do not offer you an option to pay all or part of the interest whilst others allow you to pay off interest and capital. This means that the debt can increase quite quickly over the course of the loan. In the same way as ordinary mortgages vary from lender to lender, so do lifetime mortgages so it is important to seek specialist legal advice if you are considering equity release.
When considering a lifetime mortgage it is useful to know the following:-
- The earlier you start a lifetime mortgage, the more it is likely to cost in the long run.
- The maximum percentage you can borrow is usually up to 60% of the value of your property. The percentage is dependent upon your age and the value of your property. The percentage typically increases according to your age when you take out the lifetime mortgage; while some providers might offer larger sums to those with certain medical conditions.
- Interest rates may be fixed; if they are variable there must be a “cap” (upper limit) which is fixed for the life of the loan (Equity Release Council Standard).
- You have the right to remain in your property for life or until you need to move into long-term care provided the property remains your main residence and you abide by the terms and conditions of your contract (Equity Release Council Standard).
- Usually, a lifetime mortgage product has a “no negative equity guarantee”. This means that when the property is sold, and the costs of sale have been paid, even if the amount left is insufficient to repay the outstanding loan to your provider, neither you nor your estate would be liable to pay any more than the net proceeds of sale available (Equity Release Council Standard).
- You have the right to move to another property, subject to the new property being acceptable to your product provider, as continuing security for your equity release loan (lifetime mortgage providers may have different thresholds).
- The advantage of being able to take money out in small amounts rather than one lump sum is that you only pay interest on the amount you have withdrawn. If you are able to take smaller lump sums, make sure you check if there is any minimum amount.
A Home Reversion
By contrast, home reversion allows you to sell some or all of your home to a home reversion provider. In return you receive a lump sum or regular payments. The lump sum would normally be between 20% and 60% of the market value of your home in return for selling part or all of it.
When considering a home reversion plan you should check:-
- Whether or not you can release equity in several payments or in one lump sum.
- The minimum age at which you can take out a home reversion plan. Some home reversion providers insist that you are at least 60 or 65 years of age before you can apply.
- The percentage of the market value of your property that you will receive. This will increase the older you are when you take out the plan but might vary from provider to provider.
- What level of maintenance you will be expected to carry out and how often your property will be inspected (this could be every few years).
As with a lifetime mortgage:
- You have the right to remain in your property for life or until you move into long-term care, provided the property remains your main residence and you abide by the terms and conditions of your contract.
- You have the right to move to another property, subject to the new property being acceptable to your product provider, as continuing security for your equity release loan.
- The product has a “no negative equity” guarantee. This means that when the property is sold, and the costs of sale have been paid, even if the amount left is insufficient to repay the outstanding loan to your provider, neither you nor your estate would be liable to pay any more than the net proceeds of sale available
Equity release might seem like a good option if you would like access to some extra money and you do not want to move house. However, equity release or home reversion schemes can prove to be very expensive in comparison to an ordinary mortgage. Therefore, if you are considering such schemes then you should contact an independent financial adviser who is qualified in this area, so that they can explain all your options (including alternatives to equity release), give you further advice and answer any questions that you may have.
When you have decided how you are going to proceed it is important to consult a specialist conveyancing team who can ensure that you are well informed, and your best interests are in mind throughout the process.
Get in Touch
If you would like to discuss your equity release with one of our specialists, please contact Alan Warnes, Head of our Residential Conveyancing Team, who would be glad to assist you. Alan can be contacted on [email protected] or 0118 958 9711.